The SBA's Paycheck Protection Program (PPP) ended on May 31, 2021, having made 11,823,594 SBA-guaranteed loans for a total of nearly $800 billion over its lifetime. But the demand for SBA loans is far from over. As the country emerges from the darkest days of the pandemic, small business owners are filled with new hope—and seeking new financing to rebuild their businesses. This spells an opportunity for banks with suitable loan origination systems to originate SBA loans.
New Challenges for Small Business Lenders
Without PPP money, many small businesses would not have survived the worst of COVID-19 closures. Serving these small business owners opened new doors for many small and community banks. While some tapped into long-standing relationships, others found new business by reaching out to borrowers who had been ignored or denied loans by larger banks. Moving forward, savvy small and community banks will be ready to strengthen existing customer relationships and attract new customers by offering a wider variety of SBA loans to suit their business needs.
But smaller financial institutions face some challenges in expanding their SBA loan programs. For one thing, the number of SBA-certified lenders has ballooned since the onset of the COVID-19 pandemic, creating more competition for small and midsize banks. There's also increasing complexity. The rules of SBA lending have always been complicated; the ever-changing regulations for PPP lending were just an extreme example. But concerns about fraud raised during the PPP program and government requirements demanding accountability mean the paperwork and procedures involved in making SBA loans will likely increase.
As small businesses continue to face challenges despite a re-opening economy, a growing number of entrepreneurs will be seeking other SBA loan products, such as 7(a) loans, Express, 504 loans, CAPlines, Microloans, and disaster loans. They'll also be looking for fast decisions. Are your lending operations optimized to deliver? That depends on your technology. To help ensure you're positioned for success, here are the top lending software tools that make commercial loan origination for SBA loans more accessible, faster, and more efficient.
Key Loan Origination Software Tools
1. Document Management Software
The high volume of documents needed to underwrite and process an SBA loan can be daunting, especially for banks that handle these processes manually. Robust document management software is critical to simplify and streamline the process of collecting, organizing, and managing the many documents you need to gather and maintain.
A positive customer experience during the lending process is critical. Whether customers want hand-holding during the commercial loan application process or prefer to do everything themselves, your loan origination solution should include document management tools that empower customers and bankers to easily upload documents across various interfaces, from desktop to mobile devices.
Document management software that can analyze submitted documentation, identify what's missing, and request additional documents or data from the loan applicant can speed up the application process and eliminate the need for loan officers to play phone tag or email back-and-forth with applicants.
Once documents are in the system, document management software should organize and securely maintain them while providing quick access to information whenever it's needed. SBA loans require careful documentation of the loan decisioning process to ensure that the loan guarantee will be honored if the customer defaults. Inadequate, inconsistent, or missing documentation can cause loan servicing problems and lead to denial of the SBA guaranty.
Robust document management functionality helps reduce human error, improve the speed of service, enhance regulatory compliance, save money compared to collecting and maintaining hard copies and simplify audit trails.
2. Image Recognition Software
Not all information required to process a loan application can be obtained from a database. For example, lenders must confirm customer identities using driver's licenses, passports, and other forms of photo ID. A loan origination solution with built-in image recognition software can quickly assess photographs, signatures, Social Security cards, older paper documents, and other images to verify essential information such as a loan applicant's identity, citizenship status, and more.
Another growing trend is image recognition to analyze loan applicants' online activities, including their social media presence. Gathering and analyzing this data can help banks and credit unions get a fuller picture of a loan applicant's character, a business's interactions with customers, and its reputation in the community.
3. Automation of OFAC Check
From customer identification to due diligence and continuous monitoring, adherence to KYC standards is essential to compliance and risk management. However, the requirements for KYC compliance—especially continuous monitoring—can be labor-intensive and error-prone when handled manually. Automating the process, including the OFAC check, can save time and enhance accuracy.
For example, Biz2X's Accelerate SBA lending platform automatically implements OFAC and watch list requirements and screens Do Not Bank and Limited Banking lists. Easy integration with your bank's third-party KYC applications further streamlines the process.
One report has estimated that as much as 10% of Paycheck Protection Program loans may have involved borrower fraud, and a variety of government task forces are aggressively investigating these claims. Underwriting software that includes automated OFAC checks can help prevent fraud and its associated costs for your institution.
4. API Connection to Borrower's Bank Account
If a bank fails to assess a borrower's capacity to repay the loan adequately, the SBA may not honor its loan guarantees. A thorough analysis of a loan applicant's financial situation can help automate time-consuming processes involved in credit decisioning and protect you from risk.
Application programming interfaces (APIs) that connect banking software to business owners' bank accounts enable financial institutions to see a loan applicant's financial status in real time, providing a more accurate appraisal of their financial situation and ability to make loan payments. APIs connecting you to the loan applicant's bank can automatically extract cash flow data and key metrics such as daily deposits, daily withdrawals, and non-sufficient funds transactions. They can compute key metrics such as EBITA, DSCR, and ongoing debt service to help you make intelligent decisions.
Look for a solution whose functionality includes built-in API connections with other third-party software. Appropriate approval from the loan application allows you to gather additional data from sources such as credit card issuers, point-of-sale systems, suppliers, and payment gateways.
Once the loan has been approved, an API connection to the borrower's bank account lets lenders deposit funds automatically during disbursement. Faster access to loan proceeds means more satisfied customers. Lastly, bank account API integration can facilitate ongoing analysis of the borrower's financial data to reduce risk and automate compliance management.
5. Credit Bureau Integration
Many small business customers seeking SBA loans find it difficult to access conventional business loans because they lack collateral, haven't been in business long enough to build a strong credit history or other reasons. In other words, companies seeking SBA-guaranteed loans are inherently riskier than the average business, making thorough risk assessment a critical step in the lending process.
Loan origination software with built-in credit bureau integration with business and consumer credit bureaus, such as Transunion, Equifax, FICO, Equifax, and Experian, can pull data from a wide range of sources. This helps provide the most accurate picture possible of a potential borrower's creditworthiness so you can make intelligent pricing decisions.
Credit bureau integration also enables lenders to monitor a borrower's credit profile throughout the loan life cycle. Soft inquiries can be automated monthly, so you get quick alerts of any potential red flags, such as late payments, for better risk management.
LOS Automation and the Future of SBA Lending
In 2020, many small and community lenders jumped into PPP lending to serve the unmet needs of small business owners. Expanding beyond PPP loans to offer other types of SBA loan products is a natural next step for these banks, one that will help them cement relationships with the new small business customers they gained during the pandemic.
Each SBA loan program has unique requirements for borrower eligibility, loan underwriting, loan servicing, fee caps, and more. In addition, the rules around these loans change frequently. Lenders must perform a balancing act, following strict regulatory guidelines while providing the convenience, ease, and fast access to capital that small businesses need to recover. Using an end-to-end digital lending platform with all the features above can streamline workflows in every step of the loan decisioning and loan origination process, equipping your bank to offer customers the SBA loans they need, while mitigating risk and enhancing profitability.